If you are new to the stock market, you might wonder how often you should invest in stocks. There are many different strategies you can choose from. If you know me, you also know that I advocate for long-term investing, so this blog post will introduce you to my views and suggestions, keeping that in mind. I would like to start off by congratulating you! You’ve made the most important step to get into the investing game. From now on, the journey is more about finding what works best for you.
There really isn’t a one-size-fits-all solution to how often you should invest in stocks. You can try out different strategies to see what you like. Each strategy comes with its benefits and downsides. Once you understand these concepts, you are in a better position to optimize your investing workflow.
In this blog post, I will discuss 2 strategies to choose from: Lump-Sum investments and Dollar-Cost averaging. We will look at the pros and cons of each of them, look at some examples, and talk about some general rules to follow when investing in stocks. After reading this guide, you will have all the knowledge you need to make an informed decision about your approach.
The information in this post does not only apply to individual stocks. You can use the same investment strategies when investing in mutual funds, exchange-traded funds, or index funds.
Invest In Stocks With One Lump Sum
The first and easiest way to invest your money is to get it to work immediately. When capital is available, you simply put it into your brokerage account and invest it into your stocks. To do this effectively, you must do some work beforehand. Spend time researching your companies and deciding how much of your money you want to invest in what company.
The thesis for this investment strategy is simple. You have one edge in the market: time! As a long-term investor, you enjoy the luxury of time as your most significant advantage. Institutional investors typically have much shorter timeframes to work with. They are looking at a few months or maybe a year. You can use this edge to make informed decisions based on how well a company is run. With Lump Sum investment, you get your money into the market immediately. You maximize your edge.
Getting all your capital to work immediately can be risky. Not every investor has the same risk tolerance. Keep that in mind when considering how much money you want to invest.
Pros of Lump Sum Investment
You maximize the time your money is invested in the market. In a rising Market, you maximize your rate of return by investing at low prices.
Cons of Lump Sum Investment
You might quickly see huge losses if you time your investment poorly. But it is very hard for you, if not impossible, to know the right market timing ahead of time.
Invest In Stocks using Dollar-Cost Averaging
With this investment strategy, you invest on a regular basis in a fixed plan. Instead of investing all your money, you invest a smaller predefined amount each month. Even if more capital is available, your investment amount does not change. If you, for example, have $24,000 available, you can invest it over 12 months with smaller $2,000 investments.
The purchase price of the stocks you buy is also not a factor in your investment decision. With Dollar-Cost Averaging, you buy at different price points. This way, you average the price you pay for these stocks over time, hence the name.
If your risk tolerance is lower, you choose less money to invest. This investment strategy also allows you to pause your investments depending on market conditions and market volatility. You can easily adjust your plan at any time. Or maybe your financial goals change, and you want to adjust your investment plan to your new financial situation.
Pros of Dollar-Cost Averaging
Dollar-cost averaging is an easy and less risky way to learn to invest because you only invest a small amount of money at a time. Let’s face it: every investor will make some mistakes over time. You learn from them and do better next time. If you are just starting in the stock market, this investment strategy is safer. You can adjust and pivot at any time.
Cons of Dollar-Cost Averaging
With Dollar-cost averaging, you might miss out on a positive return when the market moves up. But this downside is also an upside if you invest in a market downturn.
Comparison of Lump Sum and Dollar-Cost Averaging
To get an idea of the differences between Lump Sum Investing and Dollar-cost averaging, let’s look at some examples. We compare both strategies with an investment amount of $12,000 over a 10 year period from August 2013 to August 2023 – 120 months. For simplicity, I’m ignoring any dividend payments or their reinvestment.
Johnson & Johnson
Lump Sum Value
Lump Sum Capital Gain
DCA Capital gain
Comparing Lump Sum and Dollar-Cost Averaging in 4 examples over the last 10 years
You can see that these 2 approaches greatly vary in their capital gains when you invest in stocks. You would have ended up in fewer shares of stocks with Dollar-cost averaging. In all cases, the average annual return is higher with Lump Sum Investing. Since you are taking more risk in your investment, it does seem reasonable. However, keep in mind that by changing the timeframe, this behavior can change. Also, the past performance of individual stocks is not a good indicator of any future gains. If these examples show anything, it is that long-term investment works. It is one of the best ways to build financial wealth.
Conclusion #1: Both Investment Strategies can yield great results
These examples show long-term investing can create high, sometimes even market-beating returns. Both strategies are well-known and often utilized by many investors.
Conclusion #2: Lump Sum Investing often produces higher returns
I already mentioned that time in the market is your most important factor. These examples support this argument, as Lump Sum Investing always produced higher returns. It is the riskier approach of the two, though. Over shorter timeframes, the picture can shift completely.
Conclusion #3: Portfolio Diversification matters
When you only invest in a few individual companies, you run a great risk of underperforming in relation to the S&P 500. The JNJ example above illustrates this fact. Over 10 years, the stock has roughly tracked the market performance, but when you used the Dollar-Cost Average Strategy, you would have had less returns. You want to avoid underperformance when investing in individual stocks. Beating the market should be your goal. If not, there is no reason for you to invest in individual stocks in the first place. As an individual investor, you should aim for a diversified portfolio of at least 25 different companies.
Should You Pause Invest In Stocks On Market Downturns?
As much as I would like to prepare you for market downturns, there isn’t much I can do. They will always feel terrible! But there is something mysterious about them that I find interesting. In bear markets, investors wish they be over with as fast as possible, and in bull markets, investors want a bear market to get better prices. A good rule of thumb is to not judge if it’s a good time or a bad time to invest. There is no such thing. What matters is that you invest for a long time. No bear market will last forever.
The problem with pausing your investing is very simple. Market Downturns are very easy to point to after they are already over. Many investors try to chase the market bottom and try to time the market. Maybe you have even succeeded with that once or twice. But over time, you will likely not keep such a track record.
Your Dollar-Cost Average investment strategy is coming in handy for market downturns. Since you buy at any price, you will also buy at very good prices during such a period. On the other hand, with Lump Sum Investing, taking advantage of market downturns is not as easy.
I always say: It’s Time in the Market, not Timing the Market
When I invest, I spend more time researching companies. It’s the most essential factor in my investment strategy. Because of this, I recommend to just continue investing during market downturns. You can lower the amount you invest if you think there is a greater risk to your investment. It is a good idea to follow these 4 simple rules of investment if you plan to invest in individual companies:
#1 Buy and hold Stocks for 5+ years #2 Have at least 25 Stocks #3 Don’t overreact on short-term news #4 Reinvest into your winners
These rules also mostly apply when investing in ETFs, index funds, or mutual funds. They naturally come with a diversified asset allocation. Because of this, I recommend them for a beginner’s investment portfolio over single stocks.
Can you Automate how you Invest In Stocks
I love automation and try to implement it wherever possible! That being said, investing in individual stocks might not be the best idea for you. This investment style is heavily dependent on your research. As long as you can ensure you’ve done your research, it’s ok. But staying on top of company developments is key.
Some brokers support automatic investments, but only a few support that with individual stocks. You can contact the customer support of your brokerage account to find that out. For investments in ETFs, index funds, or mutual funds, you might have more success. Automatic investments in these financial products are less risky. This is why more brokerage firms are willing to provide such a functionality.
You also have the option to enter into a dividend reinvestment plan if you are investing in dividend-paying stocks. I have a few excellent guides about that topic and others:
Final Thoughts – How Often Should You Invest In Stocks
Think about investing as a form of art rather than science. The right answer to the question “How Often Should You Invest In Stocks?” highly depends on your risk tolerance, preference, and financial goals. For new investors, dollar cost averaging provides an easier way to get market exposure. Your returns can be greater with lump sum investing, however. There are good reasons for both strategies.
The biggest lesson for you is to understand your biggest edge in the market: time. Long-term investing works as long as you stay the course and control your mindset.
Disclaimer: The information in this blog post should not be considered tax advice or a replacement. They are solely provided for informational purposes. Please consult with a tax professional for any specific questions on your taxes. Also, none of the mentioned stocks are to be understood as recommendations. Don’t buy yourself something solely based on what you read here.